Panel to review bank advances against shares

Sinha said a study conducted by the RBI in respect of 35 banks accounting for more than 70 per cent of the total bank finance against shares revealed that the advances against shares by these banks amounted to Rs 5611 crore at the end of December 1999. This includes advances against collateral of shares and for IPOs.

The total guarantees issued by banks, including the guarantee against pledge of shares furnished by banks to various stock exchanges in lieu of margins, aggregated as on December 31, 1999, to Rs 2385 crore. RBI has already issued guidelines in respect of advances against shares, units, debentures and PSU bonds to individuals, stock brokers and corporates, he added.

Sinha said the guidelines for financing to individuals against security of shares cover the purpose, amount, margins to be maintained and lending policy, while sanctioning these loans.

The maximum limit prescribed for advances against shares to individuals is Rs 10 lakh (Rs 20 lakh in case of loans against the demat shares). The minimum margins to be taken have also been prescribed (25 per cent in respect of demat shares and 50 per cent in respect of shares in physical form).

The specific lending policy in this regard was to be formulated by individual banks with the approval of their boards keeping in view the general guidelines issued by RBI, Sinha said. The banks were, inter alia, also advised to take suitable precautions to ensure that such lending was not used for speculative purposes. As a prudential measure, banks were also required to consider restricting such advances within an aggregate limit.

A review meeting undertaken by RBI in February, 2000 with bankers revealed that banks had put in place risk containment measures such as prescription of limits on the value of shares to determine credit limits, mark-to-market of share portfolios on a regular basis and monitoring of exposure to scrips which exhibit price volatility.

Sinha said the situation today was not the same as in 1991 wherein the banks were involved in securities scam. This was the result of the precautionary measures taken by the government.

Sinha said the price fluctuations on the stock markets were influenced by multiple factors. These include expectations of investors regarding the performance of the corporate sector and the economy in general, about economic policies of the government and developments in international capital markets.

During the last two months, the Bombay Stock Exchange (BSE) Sensex has been on a downward trend but it could not be said to have crashed. Sensex peaked on February 11, 2000 at 5933.26 and closed at 4230.13 on May 16, 2000. The reported losses due to such fluctuations were at the national level since the Sensex was generally on the rise for several months before February 2000.